Sunday, July 11, 2010

I am not fully familiar with the things Michael Spence has written in the past, but from what I
know I was surprised to hear him call the Andrew Grove article thoughtful, and also surprised by his call for industrial policy:

The real issue is employment: not just stubbornly high unemployment, but a
bigger problem described recently in a thoughtful article by Andy Grove... He
argued that manufacturing is vanishing in the US, a trend that must be reversed.
The question is how.

There is little doubt that America’s social contract is starting to break. It
had on one side an open, flexible economy, and on the other the promise of
employment and rising incomes for the motivated and diligent. It is the second
part that is unraveling.

Incomes in the middle-income range for most Americans have stagnated for more
than 20 years. Manufacturing jobs are moving offshore. Globally the set of goods
and services that is tradable is expanding, but the US and other advanced
countries are not competing successfully...

The availability of low-cost, disciplined labor forces in developing countries
reduces the incentive for ... companies to invest in technologies that enhance
labor productivity in the tradable sectors of the advanced economies. As a
result, the evolving composition of advanced economies is increasingly weighted
towards the non-tradable sector, combined with a set of high-end tradable
services where both human capital and proximity matter. The rest of the tradable
sector is shrinking.

The shrinkage creates problems. ... Spillovers between R&D, product development
and manufacturing will be lost... Employment will stagnate.
Income distribution will move adversely and the social contract will erode
further.

Solutions to these problems are not easy to find. The unequal distribution of
income can be dealt with through the tax system, although this does not attack
the underlying problem. Protectionism could alter the pattern of out-migration
of manufacturing, but only by imposing costs on domestic consumers and risking
the breakdown of the open global economy model.

To avoid an outbreak of protectionism, there has to be an alternative. President
Barack Obama’s new export council ... is a step in the right direction. But a
bolder move is needed: a broad public-private partnership to invest in the
development of ... the tradable sector where there are opportunities to make
advanced countries competitive. The goal must be to create capital-intensive
jobs that have labor productivity levels consistent with advanced country
incomes. ...

We are already on a lengthy and bumpy road to a new normal. That is unavoidable.
The risk is that without a new direction in American economic policy, the new
normal may be as unpleasant as the journey.

There appears to be a change in thinking underway among economists on these
issues, particularly industrial policy. There are
some who will oppose this change with all the shrillness they can muster. If this trend continues, and it looks like it will, there will be big fight within the profession -- more
so than now -- about these ideas.

Comments

You can follow this conversation by subscribing to the comment feed for this post.

"America Needs a Growth Strategy"

I am not fully familiar with the things Michael Spence has written in the past, but from what I
know I was surprised to hear him call the Andrew Grove article thoughtful, and also surprised by his call for industrial policy:

The real issue is employment: not just stubbornly high unemployment, but a
bigger problem described recently in a thoughtful article by Andy Grove... He
argued that manufacturing is vanishing in the US, a trend that must be reversed.
The question is how.

There is little doubt that America’s social contract is starting to break. It
had on one side an open, flexible economy, and on the other the promise of
employment and rising incomes for the motivated and diligent. It is the second
part that is unraveling.

Incomes in the middle-income range for most Americans have stagnated for more
than 20 years. Manufacturing jobs are moving offshore. Globally the set of goods
and services that is tradable is expanding, but the US and other advanced
countries are not competing successfully...

The availability of low-cost, disciplined labor forces in developing countries
reduces the incentive for ... companies to invest in technologies that enhance
labor productivity in the tradable sectors of the advanced economies. As a
result, the evolving composition of advanced economies is increasingly weighted
towards the non-tradable sector, combined with a set of high-end tradable
services where both human capital and proximity matter. The rest of the tradable
sector is shrinking.

The shrinkage creates problems. ... Spillovers between R&D, product development
and manufacturing will be lost... Employment will stagnate.
Income distribution will move adversely and the social contract will erode
further.

Solutions to these problems are not easy to find. The unequal distribution of
income can be dealt with through the tax system, although this does not attack
the underlying problem. Protectionism could alter the pattern of out-migration
of manufacturing, but only by imposing costs on domestic consumers and risking
the breakdown of the open global economy model.

To avoid an outbreak of protectionism, there has to be an alternative. President
Barack Obama’s new export council ... is a step in the right direction. But a
bolder move is needed: a broad public-private partnership to invest in the
development of ... the tradable sector where there are opportunities to make
advanced countries competitive. The goal must be to create capital-intensive
jobs that have labor productivity levels consistent with advanced country
incomes. ...

We are already on a lengthy and bumpy road to a new normal. That is unavoidable.
The risk is that without a new direction in American economic policy, the new
normal may be as unpleasant as the journey.

There appears to be a change in thinking underway among economists on these
issues, particularly industrial policy. There are
some who will oppose this change with all the shrillness they can muster. If this trend continues, and it looks like it will, there will be big fight within the profession -- more
so than now -- about these ideas.